Medium term outlook far from rosy
IN FOCUS/ Chemicals
| Demand-supply situation in the sector was exposed to international prices and easy imports, both of which were affected prices in the domestic market. |
| In consequence, the Indian chemical industry was likely to witness modest growth in the medium term, the credit rating agency ICRA has warned in a recent report. |
| However, ICRA said there was tremendous scope for growth in the long term as the per capita chemicals consumption in the country was only 5kg per annum, lower than the comparable figures in developed markets. |
| Ease of imports would lead to volatility in the earnings of the organic chemical manufacturers. |
| ICRA pointed out in report that there was a fair amount of cyclicality in the industry, especially in the bulk chemicals business, and this was reflected by the significant year on year variation in consumption of four key organic chemicals - methanol, acetic acid, formaldehyde and phenol. |
| The prices of these chemicals witnessed volatility following fluctuations in demand. |
| ICRA felt the domestic prices of organics chemicals was dependent upon the extent of imports, as pricing of quite a few products were on import parity basis. |
| The domestic demand supply situation also led to movements in price. |
| In the bulk chemicals segment, excess capacity existed in certain products and these were most exposed to hammering from cheaper imports, the report said. |
| The existence of a large number of players led to significant price competition in the market. |
| The situation was better in the specialty chemicals business. Fortunes in this category was driven by research and development (R&D), which led to product differentiation and offered the benefits of value addition to end users. |
| This enabled competent manufacturers to have a say in pricing and such companies were relatively less impacted by economic cycles. |
| The chemicals business also had a formidable entry barrier, ICRA commented. Industry start-ups required significant investments even to set up organic chemical plants with a minimum economic size. |
| Besides the capital-intensive nature of operation, intense price competition from domestic producers and imports, and limited pricing power in all but specialised grades, had led to emergence of entry barriers. |
| The domestic industry was mostly involved in production of bulk chemicals and functioned on a smaller scale of operation in comparison with global players, ICRA pointed out. |
| Domestic producers thus could not exploit economies of large-scale operation, and this coupled with the capital-intensive nature of the industry translated into a higher unit cost of production. |
| Non-availability of raw materials at reasonable prices and of consistent quality was also an issue affecting competitiveness of the industry. |
| Imports as a percentage of total consumption for certain bulk chemicals was significantly high at present. |
| ICRA pointed out that imports of methanol and phenol accounted for over 45 per cent of their total consumption in the domestic market. |
| With a size of around Rs 4500-5000 crore, the organic chemicals industry accounted for only around 0.2 per cent of the GDP, said the report. |
| The sector's contribution was thus insignificant, but it played an important role as it fed a large number of end-user industries such as paints and dyestuff, fertilisers, textile, pharmaceuticals, insecticides and pesticides, food processing, leather, paper detergent, explosives and rubber chemicals. |
| Methanol, acetic acid, formaldehyde and phenol accounted for over 65 per cent of the production of organic chemicals. |